Thursday, October 27, 2011

Top earners have taken some hits which typically have not been widely reported. In the US between 2007 and 2009 for example:

99.9th percentile (the obscenely rich) a fall of 34% in income

99.0th percentile (merely filthy rich ) a fall of 16% in income

Median a fall of 1% in income.

As Greg Mankiw’s research has shown – drawing rich earnings is on average a good deal more risky than drawing median earnings – which is why we depend on the rich to take the risks that bring progress… one of the most difficult concepts to sell.

Tuesday, October 18, 2011

“Just as freedom of the press does not exist for the sake of that tiny minority of the population who are journalists, so property rights do not exist for the sake of those people with substantial property holdings. Both rights exist to serve social purposes reaching far beyond those who actually exercise these rights.”

Friday, October 14, 2011

The effect of ageing on asset prices may make the rich world’s problems worse

Sep 24th 2011 | The Economist

SINCE the bursting of Japan’s asset bubbles in the early 1990s, the country has undergone a long and deflationary process of debt reduction. During this period, Japanese policymakers have attracted criticism from (among others) Ben Bernanke, the chairman of the Federal Reserve, for their gradualist approach to reflating the economy. The critics’ charge is this: that although the Bank of Japan (BoJ) pioneered many of the policies that the Fed and others have since followed—such as committing to zero interest rates and increasing bank reserves by the alchemy of quantitative easing—the Japanese central bank still did too little, too late.

Things look rather different in Japan itself, where some say the problem lies in a lack of demand for loans from the debt-strapped private sector, rather than a lack of supply. This is the hallmark of a “balance-sheet recession”, a term coined by Richard Koo of the Nomura Research Institute to describe the process whereby households and companies pay down debts rather than embark on new spending.

In two speeches* this year, Kiyohiko Nishimura, deputy governor of the BoJ, has developed this line of thinking to help explain why Japan’s balance-sheet adjustment has taken so long. Mr Nishimura blames the prolonged slump on ageing, which is furthest advanced in Japan, but is also occurring in many of the world’s biggest economies.

His central argument is that ageing depresses asset prices. That in turn makes deleveraging tougher because debt used to finance assets is harder to pay off without incurring losses. This, he says, may have grim repercussions for America and Europe.

The theory behind the link between ageing and asset prices is outlined in a recent working paper by Elod Takats of the Bank for International Settlements (BIS). In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money; the old sell them to pay for retirement. As the working-age population rises—as it did, for instance, after the baby boom—asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen.

In his paper Mr Takats seeks to quantify this effect. He prefers to look at an international sample rather than data on single countries, because that enables more robust identification of the impact of ageing. He also focuses on house prices rather than financial assets, because they are less likely to be influenced by cross-border capital flows. Mr Takats applies two aspects of demography to BIS house-price data from 22 advanced economies: first, total population; second, the ratio of old people to the working-age population, or the old-age dependency ratio.

Between 1970 and 2009, he finds that a 1% rise in GDP per person and a 1% rise in the total population each corresponded to about a 1% rise in real house prices. But a 1% increase in the old-age dependency ratio was associated with a 0.66% drop in real house prices.

Using United Nations projections, his analysis suggests that house prices will face strong headwinds in the next 40 years as populations age. American house prices, for example, will rise by about 80 basis points a year less than they would do if you strip out demographic factors, he reckons. For faster-ageing countries such as Japan, Germany and Italy, prices would fall by more than 1% a year, though he notes that other factors may offset the demographic effects and he does not expect a meltdown in prices.

Prices of financial assets do not necessarily shadow those of property: people tend to buy and sell stocks and bonds later in life than they buy and sell homes. But they are also affected by ageing as the old sell them to realise cash. A model developed at the Federal Reserve Bank of San Francisco finds that since 1954 there has been a high correlation between the ratio of Americans aged 40-49 to those aged 60-69, and the price/earnings ratio of the stockmarket. The implication of this relationship for share prices in the future is bearish, it says.

Based on standard demographic and earnings assumptions, the San Francisco Fed’s model suggests share prices will fall by 13% between 2010-21. The good news for America is that the relative proportion of middle-aged people should rebound in 2025, implying a strong recovery.

Such estimates should be treated with caution. Ageing, at least in the short term, is fairly predictable, so markets may have already discounted its impact on asset prices. Mr Takats draws attention to the fact that elderly people may end up working longer, which would reduce the pressure to sell their assets.

But the uncertainties run both ways. As Mr Takats points out, overstretched pension systems may spur retired people to run down their assets more aggressively than expected. The BoJ’s Mr Nishimura ventures that the downward pressure on prices may be exacerbated by ageing in countries like Russia and China, whose entry into the global economy helped fuel the world’s recent asset-price boom.

Grey market

If ageing does exacerbate the costs of a balance-sheet recession, what can policymakers do about it? The BoJ, Mr Nishimura says, has sought to counter some of the effects, such as the loss of lending expertise in the banking sector and risk aversion, through “truly unconventional” monetary policy, such as buying low-grade corporate bonds and exchange-traded funds to spur investment in riskier assets; and providing funds for banks to lend and invest in promising new fields, such as innovations for the elderly. But his overall message is stark: repairing balance-sheets when the population is ageing is much harder than when it is young. Some people, he cautions, regard the turmoil since 2008 as a “fleeting nightmare”. But where ageing is endemic, there may be no going back to normal. As the title of one of his papers ominously puts it: “This time may truly be different.”

Forwards coach Steve Hansen almost unwittingly in talking to a radio interviewer this morning provided some helpful insights into strategy and even tactics.

He stated that what is needed (in preparing and then executing in a winning sports effort – in this case the RWC semi final) is:

Clarity first. Knowing with clarity what you are supposed to be doing. Then you can move to…

Intensity. Upping the intensity of effort to actually do what you are wanting to do. And with that tends to come…

Precision – which is fairly useful.

So turned around you should end up with precise and intense effort directed at exactly what you are trying to do. Very simple and no doubt very difficult to achieve (especially consistently) but it helps to know the sequence and work to it.

Monday, October 10, 2011

Opposition leader Phil Goff says that once state assets are sold, they are gone for good. If only that were true. Sadly, KiwiRail was sold but even though we tried to later pretend we didn’t recognise it, it came back to us. It truly is a dog, in so many ways.

Saturday, October 8, 2011

OP-ED COLUMNIST DAVID BROOKS

NYT: Published: October 6, 2011

Let’s imagine that someone from the year 1970 miraculously traveled forward in time to today.traveled forward in time to today. You could show her one of the iPhones that Steve Jobs helped create, and she’d be thunderstruck. People back then imagined wireless communication (Dick Tracy, Star Trek), but they never imagined you could funnel an entire world’s worth of information through a pocket-sized device.

The time traveler would be vibrating with excitement. She’d want to know what other technological marvels had been invented in the past 41 years. She’d ask about space colonies on Mars, flying cars, superfast nuclear-powered airplanes, artificial organs. She’d want to know how doctors ended up curing cancer and senility.

You’d have to bring her down gently. We don’t have any of those things. Airplanes are pretty much the same now as they were then; so are cars, energy sources, appliances, houses and neighborhoods. A person born in 1900 began with horse-drawn buggies and died with men walking on the Moon, but the last few decades have seen nothing like that sort of technological advance.

Recently, a number of writers have grappled with this innovation slowdown. Michael Mandel wrote a BusinessWeek piece in 2009. Tyler Cowen wrote an influential book called “The Great Stagnation” in 2010. The science-Fiction writer Neal Stephenson has just published a piece called “Innovation Starvation” in World Policy Journal and Peter Thiel, who helped create PayPal and finance Facebook, had an essay called “The End of the Future” in National Review.

These writers concede that there has been incredible innovation in information technology. Robotics also seems to be humming along nicely, judging by how few workers are needed by manufacturing plants now. But the pace of change is slowing down in many other sectors.

As Thiel points out, we travel at the same speeds as we did a half-century ago, whether on the ground or in the air. We rely on the same basic energy sources. Warren Buffett made a $44 billion investment in 2009. It was in a railroad that carries coal.

The Green Revolution improved grain yields by 126 percent from 1950 to 1980, but yields have risen only by 47 percent in the decades since. The big pharmaceutical companies have very few blockbuster drugs in the pipeline. They are slashing their research departments.

If you buy the innovation stagnation thesis, three explanations seem most compelling. First, the double hump nature of the learning curve. When researchers are climbing the first hillside of any problem, they think they can see the top. But once they get there, they realize things are more complicated than they thought. They have to return to fundamentals and climb an even steeper hill ahead.

We have hit the trough phase in all sorts of problems — genetics, energy, research into cancer and Alzheimer’s. Breakthroughs will come, just not as soon as we thought.

Second, there has been a loss of utopian élan. If you go back and think about America’s big World’s Fairs or if you read about Bell Labs in its heyday or Silicon Valley in the 1980s or 1990s, you see people in the grip of utopian visions. They imagine absurdly perfect worlds. They feel as though they have the power to begin the world anew. These were delusions, but inspiring delusions.

This utopianism is almost nowhere to be found today. Stephenson and Thiel point out that science fiction is moribund; the new work is dystopian, not inspiring. Thiel argues that the environmentalist ethos has undermined the faith in gee-whiz technological wizardry. Legal institutions and the cable TV culture dampen enthusiasm by punishing failure so remorselessly. NASA’s early failures were seen as steps along the way to a glorious future. Deepwater Horizon’s failure demoralized the whole nation.

Third, there is no essential culture clash. Look at the Steve Jobs obituaries. Over the course of his life, he combined three asynchronous idea spaces — the counterculture of the 1960s, the culture of early computer geeks and the culture of corporate America. There was LSD, “The Whole Earth Catalogue” and spiritual exploration in India. There were also nerdy hours devoted to trying to build a box to make free phone calls.

The merger of these three idea networks set off a cascade of innovations, producing not only new products and management styles but also a new ideal personality — the corporate honcho in jeans and the long-sleeve black T-shirt. Formerly marginal people came together, competed fiercely and tried to resolve their own uncomfortable relationships with society.

The roots of great innovation are never just in the technology itself. They are always in the wider historical context. They require new ways of seeing. As Einstein put it, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

If you want to be the next Steve Jobs and end the innovation stagnation, maybe you should start in hip-hop.

From Marginal Revolution a post by Tyler Cowen on October 5, 2011 sparked the following:

Speaking as a father of four (including a six-month-old), skimping on diaper changes is a doomed attempt at savings. You give it all back in cleaning costs in the event of what I’ll politely call “catastrophic diaper failure”.

Tuesday, October 4, 2011

Who would we expect to be the most wary about the implications and soundness, let alone the long run veracity of statistics showing a significant reduction in crime when interviewed on Morning Report today?

Monday, October 3, 2011

Discussions of random processes often include this thought experiment. Here is a “live” test… reported by the BBC.

A few million virtual monkeys are close to re-creating the complete works of Shakespeare by randomly mashing keys on virtual typewriters.

A running total of how well they are doing shows that the re-creation is 99.990% complete. The first single work to be completed was the poem A Lover's Complaint.

Set up by US programmer Jesse Anderson the project co-ordinates the virtual monkeys sitting on Amazon's EC2 cloud computing system via a home PC.

Mr Anderson said he started the project as a way to get to know the Hadoop programming tool better and to put Amazon's web services to the test.

It is also a practical test of the thought experiment that wonders whether an infinite number of monkeys pounding on an infinite number of typewriters would be able to produce Shakespeare's works by accident.

Each sequence is nine characters long and each is checked to see if that string of characters appears anywhere in the works of Shakespeare. If not, it is discarded. If it does match then progress has been made towards re-creating the works of the Bard.

To get a sense of the scale of the project, there are about 5.5 trillion different combinations of any nine characters from the English alphabet.

Mr Anderson's monkeys are generating random nine-character strings to try to produce all these strings and thereby find those that appear in Shakespeare's works.

Mr Anderson kicked off the project on 21 August using Amazon's cloud computers. Each day of virtual monkey keyboard mashing processing cost $19.20 (£12.40).

The project has been moved to a home PC to speed up text string generation and to cut the cost. To make the task even easier the text being sampled has had all the spaces and punctuation removed.

Mathematicians said the constraints Mr Anderson introduced to the project mean he will complete it in a reasonable amount of time.

Monkeys: More interested in throwing faeces than writing sonnets

"If he's running an evolutionary approach, holding on to successful guesses, then he'll get there," said Tim Harford, popular science writer and presenter of the BBC's radio show about numbers More or Less.

And without those constraints?

"Not a chance," said Dr Ian Stewart, emeritus professor of mathematics at the University of Warwick.

His calculations suggest it would take far, far longer than the age of the Universe for monkeys to completely randomly produce a flawless copy of the 3,695,990 or so characters in the works.

"Along the way there would be untold numbers of attempts with one character wrong; even more with two wrong, and so on." he said. "Almost all other books, being shorter, would appear (countless times) before Shakespeare did."

Earlier experiments have shown how difficult the task is. Wikipedia mentions a 2003 project that used computer programs to simulate a lot of monkeys randomly typing.

After the equivalent of billions and billions and billions of monkey years the simulated apes had only produced part of a line from Henry IV, Part 2.

Also in 2003, Paignton Zoo carried out a practical test by putting a keyboard connected to a PC into the cage of six crested macaques. After a month the monkeys had produced five pages of the letter "S" and had broken the keyboard.

From David Zetland’s Aguanomics blog (David is a primarily a water economist – with an interest in much else besides).

01 October 2010

Few things have captured in microcosm what has gone so painfully wrong, where racial issues are concerned, like the recent election for mayor of Washington, D.C. Mayor Adrian Fenty, under whom the murder rate has gone down and the school children's test scores have gone up, was resoundingly defeated for re-election.

One key fact tells much of the story: Mayor Fenty received more than 70 percent of the white vote in Washington. His opponent received more than 80 percent of the black vote. Both men are black. But the head of the school system that he appointed is Asian and the chief of police is a white woman. More than that, most of the teachers who were fired were black. There were also bitter complaints that black contractors did not get as many of the contracts for doing business with the city as they expected.

In short, the mayor appointed the best people he could find, instead of running a racial patronage system, as a black mayor of a city with a black majority is apparently expected to. He also didn't spend as much time schmoozing with the folks as was expected.

How did we reach the point where black voters put racial patronage and racial symbolism above the education of their children and the safety of everyone? There are many reasons but the trend is ominous. One key factor was the creation, back in the 1960s, of a whole government-supported industry of race hustling.

Racism will persist longer when governments make rules based on racism,* whether negative (allowing slavery) or "positive" (giving jobs or money to people with different skin colours).

Governments should not discriminate on the basis of colour. If anything, government should help people under criteria that are not permanent. Poverty is ok, sick is ok. Tall, short, black, white, man, woman, gay, or straight? Not ok.

And that's not even acknowledging that most government programs crowd out private programs (educating kids, caring for the local homeless) that can do the same thing, better.

Bottom Line: Governments are necessary some of the time for some things, but for all of the time for all things. Just ask yourself: Is there another way? And then go do it.

Sunday, October 2, 2011

Reviewing “American Dreamers,” Michael Kazin’s paean to the country’s radical left, Beverly Gage echoes Kazin by including the abolition of slavery among the great achievements of leftists — an example of their “utopian spirit” (Sept. 18). Such radicals did call for abolition, but radicals of a very different sort — thinkers who offered a new understanding of how societies hang together and prosper without the centralized commands that Kazin’s leftists so extol — also lent their influential voices to the cause of abolition. These radicals were classical economists.

It was economists’ prominence in the abolition movement that led Thomas Carlyle, in an 1849 essay, to defend slavery and ridicule economists as “rueful” thinkers, each of whom “finds the secret of this universe in ‘supply and demand,’ and reduces the duty of human governors to that of letting men alone.” Economists’ advocacy of freedom, even for slaves, so incensed Carlyle that he gave it, in the same essay, a nickname that — considering its provenance — economists should forever wear proudly: the “dismal science.”

DONALD J. BOUDREAUX Fairfax, Va. The writer is a professor of economics at George Mason University.